Will Low Oil Prices Inhibit the Growth of Renewable Energy?

Ziyue Zhu, MPP

Over the past year and a half, crude oil prices have dropped from more than $100 to less than $30 per barrel. The oil industry is now encountering one of the deepest downturns in its history, and the rate of demand is becoming slower.

Meanwhile, global  investment in renewable energy increased to $270 billion in 2014 – a  17% increase from  2013. For the very first time, renewable energy capacity reached 100 Gigawatt in 2014 ( excluding large-scale hydropower projects), which could provide electricity to approximately  285 million people worldwide.

However, should we worry that this oil price slump will cause a reduction in renewable energy investments and a pause on current energy transitions?

The correlation between oil prices and renewable energy investment is not strong and lacks convincing evidence, primarily because oil and renewable energy operate in different markets. The reasons behind the tumbling oil prices and the rise of renewable energy are not related to each other.  Instead,the current oil price plunge closely mirrors changes in the market, politics, and economic trends.

Economic and Political Considerations Affecting the Oil Market

The price of oil is partially determined by the market. While global oil production expanded to 95.7 million barrels per day (mb/d) in 2015, the world consumption of oil was 93.8 mb/d. The vast production of U.S. oil essentially manipulates oil prices, since it worsens the oversupply issue in the market and forces the decrease of prices.

In addition to the lagging demand, a series of geopolitical linkages have increased risks  for oil market investment and caused volatility. Decreasing oil prices are regarded as one of the strategies behind economic sanctions on Russia since 2014. The turmoil in Syria and Libya has also brought market uncertainties.

Furthermore,  less compelling economic performance from emerging economies, particularly from China, implies a decrease or plateau of oil demand growth in the coming years.

Also, as sanctions are lifted, Iran’s oil production could become an additional factor aggravating price decline, since it could possibly exacerbate the current flood of oil in the market.

Source: NASDAQ, 2016; UNEP, 2015

The Renewables Market is Thriving

Renewable energy, on the other hand, is probably in the best time of its history.Falling costs are turning renewable energy into a competitive alternative to conventional energy resources. For example, the price of solar panels has decreased more than 80% in the past five years, mainly because of China’s research and development  and innovation in renewable technologies. According to the estimation of Energy Information Agency, the levelized cost of electricity of wind in the U.S. (onshore) would be $57.7 per megawatt-hour (MWh) (at 2013 prices) by 2020, which is lower than the price of conventional coal ($60.4/MWh, at 2013 prices).

Additionally, public awareness about environmental risks of oil and fossil fuels has improved greatly. The “real” prices of oil and other fossil fuels are not cheap, because of negative externalities such as air pollution and climate change.

Even with low oil prices, the transition to a low-carbon and sustainable economy will  not stop. Both policymakers and entrepreneurs have recognized this trajectory, and are prioritizing renewable energy development worldwide. For instance, the Indian government has committed to scale up India’s renewable energy capacity from 35 GW in 2014 to 175 GW by 2022.

Are jobs a real concern?

Policymakers, entrepreneurs, and workers are also concerned that a move away from fossil fuels will lead to an increase in unemployment. Indeed, 48,000 oil-related jobs in Texas were slashed from June to December 2015, but this was due to oil price slumps rather than renewable energy transitions. If the decline of oil prices continues, the situation will surely get worse, but this is due to the realities of the oil market, not the renewables market

Fortunately, the renewable energy industry could create millions of new “green jobs” around the world by 2030, especially in large economies, such as the United States, the European Union (EU), and China.

How economically linked are oil and renewables?

In 2008 and 2009, there wasn’t a tumble in renewable energy investments, despite  the financial crisis. During the period of the global financial crisis, oil prices dropped nearly 70%, however, the investments of renewable energy merely decreased 1.3%. Thus, it is reasonable to believe that the link between oil prices and renewable energy investments is weak.

What will the future look like?

Volatility in the global oil market will probably last for a while,  which implies further depression in employment and the economy, at least for countries that highly depend on oil exports, such as Russia and Venezuela. However, for countries that have net oil imports,  will likely welcome the benefits from low oil prices, while this will save more money for consumers. On the other side, it is expected that both the public and private sectors will step up their investments in renewable energy in the near future and boost the global economy in a healthy and sustainable way around the world.

“Peak oil” still has a long way to go, and a world fully powered by renewable energy is not around the corner either. Nevertheless, energy transition is inevitable and the growing renewable energy market will continue to put great pressure on fossil fuel industries.

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